A Wearables Startup Playbook

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Few sectors have received as much buzz as the wearables market. From fitness bands and anklet baby monitors, to smartwatches and Google Glass, wearables are fun, cool, and cutting-edge.

The rise of mobile broadband, commodity sensors, smartphone-based companion apps, virtualized manufacturing and supply chain, crowdfunding, and nimble design have converged to make wearables mainstream. With the category now validated as a strategic hotspot for all major corporations and platforms, investors are clamoring to fund wearable tech startups.

ABI Research predicts wearable devices will exceed 537 million annual shipments by 2018, with smartwatches and glasses being the fastest-growing categories. Not only are major tech companies like Apple, Google, Samsung and Intel investing heavily in wearables, but non-tech giants like Nike, Under Armour, Adidas, lululemon, and others now view the category as strategically critical to future profits. Credit Suisse is extremely bullish on wearables; the research firm believes the market could be worth $50 billion by 2017.

But what does it really take to build a viable, lasting wearables company, and can these high-tech gadgets generate solid returns for investors?

As an early investor in Basis (acquired by Intel last month) before there was a formal category name, I’ll continue to bet on the sector. But I won’t invest in just any wearables company based on slick industrial design or even an oversubscribed Kickstarter campaign. I actually fear that despite all the rosy predictions, most of the startups in the space will end up in the dustbin of history because of the immense challenges in building standalone companies.

Here are some lessons I’ve learned that I hope will help wearables entrepreneurs in this field avoid common pitfalls along their journey — lessons that are also well-suited for connected devices startups in general:

Assemble A Team of “Avengers”

Most wearable companies have either hardware- or software-heavy founding teams and spend considerable effort going up the learning curve in the area they’re not as familiar with. But to win the wearables space, you’ll actually need to build three mini companies (hardware, software and platform) under one roof, which is no small feat from a hiring perspective.

From day one, you’ll need to be assembling a diverse Avengers-style team of rock stars encompassing hardware, software, firmware, design, data science, manufacturing, logistics, user experience, community management, customer support, app store, API and product-marketing expertise. Top wearables startups will eventually be taking on Apple, Google and other big boys who are capable of delivering delightful integrated hardware and software experiences, so you’ll want to design your organization to be able to do the same.

If you’re not an extremely technical founder who can work out the intricacies, then you’ll need somebody who can see how all the pieces will fit together.

Fortunately, very few other large companies can cover all these bases at any meaningful level, so the caliber and diversity of your team will play a key advantage. Building your own team of Avengers can be maddeningly difficult in today’s labor market, and you’re corralling talent sets that haven’t necessarily worked together under the same roof before. But it’s worth the time, effort and dollars, given the inherent value you’re creating, by assembling the right mix of people.

Get the right engineering lead

Spend extra time on attracting the right systems engineering lead. This person will save your company time and time again, as the tectonic plates of hardware, software and firmware engineering grind together during the long, hard road to shipping product. He or she will serve as the referee when tempers run hot and all fingers are pointed at each other as to why the product is again delayed. The interdependencies are complex, and if you’re not an extremely technical founder who can work out the intricacies, then you’ll need somebody who can see how all the pieces will fit together.

The devil’s advocate

Make sure there is someone on the team who is asking the key question: Yes it’s beautiful, but is it truly wearable? Is your device too bulky, and will it interfere with shirt sleeves, belts, pants or other clothing and jewelry? Is it fashionable enough that users are proud to keep wearing the device even if they don’t engage with the data or app after a couple weeks? Does the device help the user make a personal branding statement in the right way? How can the device be personalized, and can it come in white and pink as well?

When your product team or industrial design firm shows you breathtaking mockups with sleek new materials allowing for attractive finishes, modular accessories and swappable bands, make noise. Your internal Spidey sense should be going off like crazy, with visions of poor fit for slender or thick wrists, unforeseen skin rashes, supply problems from boutique materials vendors, fit and finish rework, temperature and moisture sensitivities and mass recalls.

Assume the worst and rigorously review this disaster checklist lest you suffer recalls of units already in the field like some great companies have.

Develop A Crowdfunding Campaign

The rise of crowdfunding sites like Kickstarter and Indiegogo are the kindling that helped ignite the wearables and the Internet of Things blaze. Companies like Pebble and Misfit have used crowdfunding platforms to not only raise money, but to also engage pre-order customers.

Product story and creating community

Use the power of personal storytelling to provide a glimpse into the people behind the idea. Share your own motivation and dream to give the audience a sense of why you’re working so passionately on your product. And when it comes to explaining the “what,” be sure to use slick visuals, including design mockups and catchy videos engineered to be shared on social media Coin did an amazing job with its video and Facebook ad campaigns, as did Tile.

Your crowdfunders aren’t just buying your product because of utility or coolness. They want to participate in the journey and play a part in the story.

Remember that you’re designing for the “Holy Sh*t, I gotta have that!” moment in the first few minutes. Without triggering this impulse reaction, you’re not going to convert viewers into pre-order buyers and sharers. But the most successful crowdfunding campaigns leverage something even more important than the beauty or cool factor of the product – they harness the Ikea Effect, which dramatically increases the value of a product to customers by involving them in the creation process.

Your crowdfunders aren’t just buying your product because of utility or coolness. They want to participate in the journey and play a part in the story. This is why VIP crowdfunding packages that offer unique and scarce experiences often sell out first, despite the much higher price points: Many of your supporters are looking to buy an experience that they get to talk about (i.e. a story of their own) and not just a product.

Plan for this by thinking through all the different ways you could offer deeper touchpoints with your supporters. Set up tiered bundles and limited-edition experiential packages, whether it’s letting them have input in the creative process, hang out with the creators, see their names on the credits, attend the opening launch party, or own a limited-run version of the product in pink.

Product-delivery projections

Once you have created a runaway success and secured the funding you were looking for, setting timing and expectations with your early community is everything. More likely than not, you’re going to get delayed and miss your advertised launch date. It’s better to just expect and plan for it.

The one factor in your control is when you go live with your pre-order campaign. The rule of thumb is that the shorter the gap between taking pre-orders and an achievable ship date, the better. This all comes down to visibility on the details of your manufacturing process, and the more homework you do ahead of time on manufacturability and DFM (design for manufacturability), the better off you are.

Have as much clarity as possible on viably delivering the product as promised and on time.

I meet many founders who have wickedly cool concept sketches and industrial design, but haven’t spent nearly as much time thinking through the manufacturability of the product and the various trade-offs they’ll have to deal with to get to product launch on time. For example, plastic injection molding may not sound like cutting-edge rocket science, but the nuances and devilish details involved can bring a startup to its knees in a “death by a thousand cuts” fashion.

Do yourself a favor and wait before launching your crowdfunding campaign until you have as much clarity as possible on viably delivering the product as promised and on time. Yes, there’s the terrible pressure of wanting to be first in the market before a competitor launches something similar, but remember the three strikes rule: Your backers will likely give you one, maybe two, hall passes for schedule slips, but even your most die-hard fans will start to give up on you no matter how profusely you apologize and over-communicate the situation for slip No. 3.

Cultivate community

While crowdfunding is a great way to bootstrap and raise funding, it’s just a baby step on the road to success. The upside is that it’s gotten easier to get started with a wearable device idea. The downside is that you’ve now got a highly involved, engaged and vocal community of customers to manage as soon as the first pre-order comes in.

Whether you like it or not, community management must become a core competency of your company from the get-go, and you’ll need dedicated resources for this. Your supporters will be an unruly, organic beast comprised of different personalities, all excited for your success but also impatient to get their shiny new toy. Your most enthusiastic fans can quickly become your most vocal haters.

The good news is that this community is yours to tap into and communicate with directly, so don’t just treat them as passive customers waiting in the wings. Think of them as a huge focus group, eager to engage and offer their feedback in the form of pre-launch market research as you try to hone your product-market fit. Many good startups take the pre-launch period as an opportunity to bounce ideas and design decisions directly off the customer community, and in many cases this has refined the product and led to better choices.

This community is yours to tap into and communicate with directly, so don’t just treat them as passive customers waiting in the wings.

Sometimes, over-communicating to your audience about what’s happening can engender a greater sense of trust, especially when it comes to challenges and unforeseen problems you’re dealing with. However, in the case of ongoing delays and repeat schedule slips, you’ll see customers turn into outright haters, throwing your promises in your face to the point where you’ll feel it’s just easier not to say anything at all anymore.

Ideally, the more loyal supporters that you’ve earned through open communication will speak up on your behalf. And don’t be afraid to reach out directly and publicly to your most vocal haters. They’re often seeking acknowledgment and can be turned into your fans again by involving them in the process.

Manufacturing And Distribution

After you raise money through crowdfunding, the real work begins: getting your product manufactured and launched, while keeping an impatient community happy along the bumpy road ahead. Unfortunately, this is the time when most startup teams realize that they don’t actually know what they don’t yet know, and end up paying steep tuition in climbing the manufacturing learning curve.

Traditional wisdom is to “just outsource to an Asian CM or ODM,” but finding a reputable Asian manufacturer is difficult and costly, especially in terms of time, complexity, and re-work. Imagine a nightmare scenario in which your local China GM steals your IP, quits the company and launches a direct competitor, costing you a year of work.

Or that you sign explicit contracts with tier-2 and tier-3 manufacturers and suppliers (since as a startup you’re unlikely to get the attention or proper deal terms from a tier 1 like Foxconn), only to have them cut corners on quality and agreed-upon specifications as they try to eke out additional pennies of their own margin. You then discover that you can’t practically go after them for breach of contract, and then find that they’re in cahoots with your other suppliers who are now holding your tools hostage.

These are all situations that some of my companies have faced. Even Pebble, with one of the most successful crowdfunding campaigns of all time, ran into manufacturing problems that caused disgruntled customers to suffer long wait times for their watches.

This is actually par for the course for almost every crowdfunded hardware startup I’ve seen: expect things to take much more time and money for completely unanticipated reasons (“Oh hey! They really do take the week of Chinese New Year off!”). Luckily, next-generation supply chain and logistics virtualization platforms like PCH International (another of my prior portfolio companies) can take some of the pain out of trying to go direct to Asia.

But realize that you’re likely to sacrifice initial margins for reliability, quality, and peace of mind in launching on time, and appeasing an impatient list of customers who have already given you their credit cards.

The return of “Made in America”?

3D Robotics Assembly Plant in Tijuana, Mexico

My advice is to just get your product launched on time, keep the community on your side, and then worry about optimizing manufacturing and margins later. In fact, I actually encourage consumer hardware startups to seriously evaluate “made in North America” as a starting point (as my other company 3D Robotics did, with operations in Tijuana). The bill-of-materials cost, production capacities, and margins won’t be optimal, but may actually be worth the gains from working in the same time zone, language and legal jurisdiction.

You may also have the chance to learn critical details about the nuances of your manufacturing process, thus making you smarter in future dealings with overseas partners who may or may not be trying to pull the wool over your eyes. Again, with U.S.-based supply-chain-solutions providers such as PCH and their hardware accelerator Highway1, you may be able to find a workable hybrid solution to bridge the North America/Asia gap. I’m also hoping that regions like Detroit may someday be able to reinvent themselves through boutique manufacturing outfits optimized for small batch production runs for startups.

Employ behavioral economics in setting up your price points

Do yourself a favor: if you haven’t already read Dan Arielly’s “Predictably Irrational,” go out and pick up a copy and apply some of the lessons when deciding upon your price points. Some I’ve found handy in the world of wearables include:

Accessories and shipping and handling. Terrific places to boost margins.

Scarcity commands its own premium. You’d be surprised by the power of Limited Edition Pink or White. Same goes for personalization: Is it possible to offer (and upsell) engraving or printing of user-provided text, logos or images?

Bundled options. If customers find your product that innovative and exciting, you’ll notice that they rarely just buy the basic bare-bones device if you give them other attractive bundle options. Think about grabbing their attention with a $49 or $99 price tag, but quickly demonstrate how much additional goodness comes with the Starter Kit package, or the Silver, Gold, or Black Diamond Elite bundles. What about the Family Pack that comes with multi-account sync and management? Or the Platinum Plus bundle that comes with one year of subscription service?

Get creative with your bundles, and think of the extra peace of mind and delight that comes from extra chargers for the home, office and car; spare battery packs; swappable bands for work and workout; extended warranty periods — you get the picture.

Think of offering a “baller package.” It comes with gold plating, 24/7 (outsourced) concierge service, lifetime subscription service, recognition in the user community, and every possible accessory and add-on. You may only sell a few of these, but you’ll end up lifting the attach rates of the next highest bundles by several points. At the same time, don’t be surprised if you sell out of these first: when whales decide to spend, they don’t do so based on economic value – they spend because they can.

Building ongoing demand and distribution channels

To me, an oversubscribed crowdfunding or waitlist campaign can often be a false positive, just as a burst in download activity for an app featured in TechCrunch or the Apple App Store may only be temporary, primarily reaching the early adopters.

Continue to test for what it takes to generate ongoing pre-order interest even after the crowdfunding campaign is over, and see if you can sustain some level of ongoing demand. Try multiple approaches, from invite codes, to Word of Mouth campaigns, Facebook advertising, and SEO. See if you can redirect traffic from an expired crowdfunding page directly to your own site, where you can still take waitlist sign-ups. (Many startups we’re seeing are also using next-gen self-hosted crowdfunding and self-start platforms like CrowdTilt, Celery, SelfStarter, Crowdhoster Shoplocket, etc.).

Post-launch, you’ll likely need to raise a monster follow-on round to ramp-up demand generation, as well as to launch distribution on eTail (Amazon) and retail channels (BestBuy, Walmart, etc.). The more you can prove organic, direct e-commerce demand for your product, the better leverage you’ll have in working with distribution channels. And never expect your distribution channels to help with meaningful demand generation – that’s your job, not the blue shirt at BestBuy.

You’re unlikely to land an end cap in retail or a promoted slot on Amazon (unless you shell out big money or have explosive ongoing sales already), so prepare to be just one product lost among many on the shelf, and be ready to deploy your own marketing war chest in support.

The Role Of Data, Community And Metrics

Most wearables startups that pitch me place heavy emphasis on the value of the data they’re collecting, and aim to be the centralized data repository of their users’ lives, eventually aggregating, measuring and generating insights across multiple devices, apps and feeds. While this sounds great to VCs, the reality is that the data needs to be made relevant, continuously engaging and “playable” to users in order to get them wearing the device past the dreaded three-week habit-formation threshold and beyond.

While sensors and algorithms can tirelessly track your stats for you around the clock, it’s all too easy to dismiss a recommendation or alert on a screen after you’ve seen it for the 10th time.

Many startups are proud of the pretty dashboards and feeds they show to users via companion apps, but these lose the novelty effect quickly if you just show the same thing to users over and over again. Think of how you can provide insights and apps that actually adapt and progress with the user’s journey, and not just simple, static gamification and missions. Expect that users will tire of tracking the same metrics over and over again, no matter how disciplined they are. Can you instead provide multiple branches of mastery and habit building, and even allow for multiple ways to “play” and “win” to accommodate different personality types?

Offer people-powered value

I believe that the future of services enabled by wearables will ultimately be a hybrid model combining algorithm and AI with human-powered networks, harnessing the best of man and machine. While sensors and algorithms can tirelessly track your stats for you around the clock, it’s all too easy to dismiss a recommendation or alert on a screen after you’ve seen it for the 10th time. This is where the power of communities, cohorts and coaching come in.

People are often most accountable to other people, and nothing bonds humans more deeply than a shared struggle against a common adversity — be it weight loss, drug addiction, an obstacle course filled with electrified wire, or a hostile enemy force trying to kill you – this is why the small group mechanic plays such an important part in Weight Watchers, AA, Tough Mudder, and the military. But don’t assume that users always want to be “social” with the habits they’re working on, particularly if they’re uncomfortable to talk about or potentially embarrassing.

In fact, I often advise startups to avoid the usual Facebook/Twitter/Instagram auto-share integrations, and instead try to turn their user base into a vertical community of their own. Offer an opportunity for customers to join cohorts of fellow users who are embarking on the same phase of a journey (total strangers can often be more comfortable to team up and share with when you’re in the same boat together). Match them up with veteran-user mentors and provide coaches to lead the way.

Not only are these types of group and individual coaching services an opportunity for a subscription upsell, but they’re also a way for your customers to elevate their standing and involvement in the user community and stay engaged by working with others. Retrofit and GoQii are some interesting examples of startups in the wearables space harnessing some of these mechanics.

Devices without deep science and multi-sensor competence are doomed

Think of the wearables market as an intensifying arms race of how many sensors and deep algorithms you’ll be able to pack into a connected device in a quest for increasingly granular data that can be collected seamlessly and around the clock. The point of this data is to generate more and more dramatic insights to help improve users’ lives.

The future winners in the wearables space will have two ace cards in their hands: one is a year or more lead-time in using unique or multiple sensor types in the device; the second is the data science know-how to correlate across multiple data streams to mine for richer insights.

Eventually users will realize that asking a pedometer to analyze sleep phases is a bit like asking your shoes to talk about your TV-watching preferences.

Take the case of connected pedometers. As beautiful as you can make one look, ultimately any number of competitors can launch a similar offering by throwing in an off-the-shelf accelerometer (expect every coming smartwatch to have one, as well). You can release apps that claim to measure sleep quality and other deep insights, but eventually users will realize that asking a pedometer to analyze sleep phases is a bit like asking your shoes to talk about your TV-watching preferences. Customers’ expectations will continue to rise, and after their first pedometer they’ll be asking “what else can these things do?”

Ideally your device leverages multiple sensors to paint a deeper data picture, and maybe you’re the first in market with a next-gen sensor that others haven’t tried to use before. Perhaps you’ve found a medtech or industrial sensor type that has never been tried for a lighter-weight consumer use case before.

Either way, wearables are a big data play in the long run, with your algorithms crunching multiple inputs. These might include sensors on your own device, additional sensors from other devices the you’re using, and even other feeds and sources you can gain context from — be it cloud-based calendars, email accounts, social media feeds, location, public databases, and other apps. You’ll need killer data scientists to pull this off, and that team alone may end up fueling a tremendous amount of your future strategic value.

Wearable companies are measuring the wrong metrics

Many wearable tech companies tend to manage by a standard set of metrics: number of units sold and shipped, product gross margins, sell-in and sell-through in the channel, contribution margin versus returns, support and customer acquisition costs, and maybe device activations and total install base. But few companies measure what really matters: how often users engage with the devices and the accompanying software and services; the average lifetime of active usage; and the ways users are engaging.

Successful wearable devices startups are really software and services companies, so they’ll need to adopt standard software and app metrics: percentage of users registered, registered users to monthly active users; monthly active users to weekly active users or daily active users; average revenue per daily active user; and lifetime value. Of course, this requires the proper instrumentation and analytics to track, so think of how you bake those hooks into your device, app and cloud. Just like most mobile apps are forgotten about shortly after download, many wearables are no longer worn after a month or two.

But if you’re looking to capitalize on the Device-as-a-Service business model, your entire strategy hinges upon active usage, just like any company with an in-app purchase and upsell offering. If you can lock in attached subscription services from the initial purchase, all the better. Otherwise, you’ll need to obsess over active usage and ongoing engagement of your customers.

The Future Of Wearables

In the early days of this market, we all tend to think of wearable tech startups as hardware companies driven by beautiful design and cool companion apps. We focus on product gross margins, pre-order volumes, and then retail demand, sell-in, sell-through and total install base. We expect that each holiday season there will be a new rev of the product, and that margins will hopefully hold through volume and supply-chain optimization as the competition and channel distribution start to takes their toll.

Successful wearables startups will actually be software and services companies wrapped in hardware.

However, focusing on hardware sales as the primary business model actually places a wearables startup on an even more “hit-based” treadmill than a game or movie studio. I worry that most of the software, apps, and APIs built for today’s connected device startups are treated more like an after-thought or a future roadmap item to deal with later. In fact, I predict that the most successful wearable companies will really be software and services firms, with a hardware entry point. Even the most gorgeous device ends up unworn and collecting dust after a few weeks unless it includes compelling software and services to make the user’s life easier, better, more fun, and/or more productive.

Over time, it’ll really be the software and service experience that keeps users coming back, and it’s here that you’ll need to deliver a magical experience – from the out-of-the box moment to one-year-purchase anniversary and beyond. Creating a software product roadmap should be the first thing you do – even before you bring in designers to create an awesome-looking gadget.

You can’t bolt software onto your hardware later; it has to come first, and it needs to be baked into the core experience. Ask yourself these questions: how much better can the device be made through the SW and service experience? Can you even design the device to be purchased with a subscription up front? Not every wearables startup may be a fit for a subscription service, but it’s certainly worth thinking about. (Although not a wearables company per se, Dropcam managed to achieve a majority of users signing up for recurring subscription services very early on, and is an inspiring point of comparison.)

Of course you’ll have grand ambitions to become a platform (or will be told to grow into one if you take significant VC funding), so you’ll need to have your API and SDK locked in on the roadmap. In addition, you’ll need your first Killer App or three to legitimize your platform, and use these as an opportunity to begin building out your own App Store for your device.

Cut API integration deals with several well-known apps in adjacent categories, and proudly feature those logos on your site and product packaging. In the process, you’ll hopefully be demonstrating to your users that your product isn’t just a one-trick tracker, and that it offers a whole “mall” of use cases and habits to take on, while adding value to other devices and apps that the customer is already using. Eventually, you may even host hackathons and provide third-party app support with your own app and content publishing model.

Be prepared to have a team devoted to managing this side of the business, and see if you can get a Deepak Chopra, Tim Ferriss, or other noted influencer, thought leader or celeb to co-author an app or module to showcase. Building the backends and technology for all these pieces is no trivial task, and you may want to look at off-the-shelf and PaaS (platform as a service) solutions to fill in parts of the stack versus building the whole thing in-house.

Plan for a day you exit the hardware business altogether

If your product idea is that great, then you can expect it to attract copycats, from other well-funded startups, fast-followers, and especially massive incumbent corporations that have decided your category is now strategic to them. Better to anticipate this day, and think several moves down the chess board when Foxconn rolls out a white-label version of your device, or Apple, Google, Samsung, and Amazon announce their offerings.

While terrifying to suddenly be square in the crosshairs of the big boys, recognize that you’ll also be a potential buy or build solution.

By that point, ideally your software and service business, as well as user community, are firmly in place, and difficult to displace. Your brand is strong and even becoming the “Xerox”-style verb in your category. You’ve got retailers and channel increasing their purchase orders, enterprises looking for volume deals, and maybe healthcare companies asking to help you develop an FDA-approved version for the medical market. Most importantly, your phone will start to ring off the hook with partnership, OEM and joint-venture opportunities with all the other companies worried about being left behind if Apple, Google and Amazon get serious about your space.

While terrifying to suddenly be square in the crosshairs of the big boys, recognize that you’ll also be a potential buy or build solution for everyone from Lenovo to GE, Philips to J&J, Qualcomm to Foxconn, and Comcast to Kaiser. And if your software and subscription businesses stands to grow non-linearly from mass distribution deals, it may not be a bad idea to exit the hardware business altogether at the right time and spread your tentacles elsewhere.

Just remember to own the customer relationship if possible, which isn’t out of the realm of possibility: most device and component makers aren’t set up to run effective software and services businesses, and will likely need you to run that side of the house for them.

Conclusion

These represent a handful of lessons that I try to share with entrepreneurs looking to play in the wearables space. It’s meant to be a daunting list: “hardware” starts with the word “hard” for a reason, and it’s better to go in with eyes wide open. Sadly, Basis was founded in an era before we could properly leverage crowdfunding, hardware accelerators and many of the suggestions listed above, but we always had the notion of Device-as-a-Service firmly in mind even from the early days.

Along the way we hit almost every pitfall possible and many we hadn’t expected, including the speed at which the category evolved from “who the heck would wear stuff like this?” to “must-have strategic priority” for many major tech giants. It’s a true testament to the quality of the team and the scope of their vision for persevering through such a difficult journey and achieving a happy outcome.

Overall, I’m still bullish on this space, because the opportunity is huge and there are so many more valuable devices and services to be invented (I’m not kidding when I talk about wanting to find “the Nest meets Retrofit of connected Toilets”). Entrepreneurs who keep the above lessons in mind have a better shot at success, and I’d be happy to champion anyone able to apply these learnings to their business plan.

Editor’s note:Tim Chang is a Managing Director at Mayfield Fund. Some of his current investments include 3D Robotics, fitmob, Healthtap, and Moat. Some of his past successes include Basis (acquired by Intel), ngMoco (acquired by DeNA) and Playdom (acquired by Disney).